ISM Manufacturing Worse than Expected, but Still Expanding
The Manufacturing ISM Index is based on data compiled from purchasing and supply executives in the United States. The Index measures new orders, backlog of orders, new export orders, imports, production, supplier deliveries, inventories, customers' inventories, employment and prices.
According to the Institute for Supply Management, the ISM Manufacturing Index in February decreased to 52.4 from the 54.1 reading in January. This also comes in less than the anticipated reading of 54.5.
This is essentially bullish for the manufacturing sector because the sector is still expanding since it is greater than 50.0, and also positive for general economic growth in the United States for the same reason. However, equity markets responded negatively as February's reading came in less than expected and less than January.
According to the Institute for Supply Management's report, manufacturing continued its growth in February as the PMI registered 52.4 percent, a decrease of 1.7 percentage points when compared to January's reading of 54.1 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI in excess of 42.6 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 33rd consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 31st consecutive month. Holcomb stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (53.3 percent) corresponds to a 3.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for February (52.4 percent) is annualized, it corresponds to a 3.3 percent increase in real GDP annually."
Traders who believe that ISM Manufacturing Index is a leading indicator for the US economy, you might want to consider the following trades:
- Long general industrial companies like Illinois Tool Works (NYSE: ITW) or Caterpillar (NYSE: CAT) as these companies will benefit for increasing industrial production.
- Also, long Consumer Discretionary companies like Target (NYSE: TGT) or the Consumer Discretionary ETF (NYSE: XLY)
Traders who do not believe that the manufacturing survey is a leading indicator for the general US economy, you may consider alternative positions:
- Long Consumer Staple companies like Procter & Gamble (NYSE: PG) and Colgate (NYSE: CL) because even if the economy is struggling, people still need to buy staple products like shampoo and toothpaste.
- Also, short big-ticket appliance makers like Whirlpool (NYSE: WHR) if the manufacturing trend is worse-than-expected.
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